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NewsletterThe Dispatch February 1998 In this issue:
Xerox Patents Trump Antitrust Challenge Xerox Corporation has a dominant position in the copier market and has also pursued an aggressive legal and marketing strategy to maintain its strong position in the related equipment service market. Since 1989, Xerox has refused to sell or license its copyrighted software and patented copier technology to independent service organizations which compete to service Xerox© copier equipment. In some cases, Xerox has sold patented equipment and parts to service organizations but at markups as high as 2,000%. Claiming that its patents and copyrights grant monopoly rights, Xerox argues it has the right to exclude competitors by refusing to sell or license its technology or by charging prohibitive prices. To counter Xerox, service organizations have openly cloned Xerox© parts and software and copied Xerox© instruction manuals for use in their service businesses. Relying on the United States Supreme Court's decision in Kodak v. Image Technical Services (1992) which might be read as preventing a manufacturer of brand name equipment from unilaterally refusing to sell parts and equipment to independent service organizations, the service organizations challenged Xerox's refusal to sell or license and its pricing strategy as antitrust violations. On first look and on the basis of the frequently criticized Kodak decision, a federal court agreed with much of the argument pressed by the service organizations. In March 1997, the United States District Court for the District of Kansas upheld Xerox's copyright and patent infringement counterclaims but stated that the company's exclusionary practices for service parts and equipment could provide a defense for the service organizations. The District Court ruled that Xerox could not "leverage" its patent monopoly for parts and equipment in the secondary market for equipment service. In Kodak, the Supreme Court found that a manufacturer of major brand equipment can be considered to exercise monopoly power in the market for service and parts for its own equipment and is therefore subject to antitrust scrutiny for its conduct in that market. Xerox immediately asked the District Court for reconsideration, and in an about face, the court rejected its earlier Kodak analysis. First, the District Court distinguished Kodak because it had not directly considered patent rights. Then, the court ruled the antitrust laws do not limit a patent holder's monopoly rights to a single market. Consequently, Xerox has the unilateral right to refuse to sell or license its intellectual property in every market segment in which its intellectual property is applied, including the market for parts and service. Noting that the patent laws of the United States predate the antitrust laws by more than 100 years and that antitrust laws do not repeal or significantly constrain patent rights, the court ruled that Xerox has the right to exploit its patent monopoly as it sees fit. While such marketplace conduct would raise an antitrust claim in other contexts, the core of a patent holder's legal monopoly is the unilateral right to prevent others from using any rights to the patent. CSU Holdings, Inc. v. Xerox Corporation, 964 F. Supp. 1479 (D. Kan. 1997).
Bruce Sunstein provides strategic advice for development and enforcement of intellectual property rights and for the structure and implementation of technology-based business transactions. Appeals Court Upholds Jury's Rejection of Infringement Claim Means Plus Function Claims Read Narrowly Bromberg & Sunstein attorneys successfully defended Abbott Laboratories and NP Medical, Inc. against patent infringement charges in the case of B. Braun Medical Inc. v. Abbott Laboratories, _F.3d_, 43 U.S.P.Q.2d 1896 (September 8, l997), where the Court of Appeals for the Federal Circuit upheld the jury's determination of non-infringement in the lower court. The case went through two jury trials in federal district court before reaching the Court of Appeals. Lee Bromberg led the successful defense teams which included Bob Kann, Tim Murphy, Kerry Timbers, and Judith Stern on the appeal. The case was unusual because claim interpretation was given to the jury, despite the Markman rule that claim interpretation is an issue of law for the court and not for the jury. Braun holds a patent on a medical device, a valve for an intravenous line that permits injection or aspiration of fluids by means of a needleless syringe, thereby eliminating the risk of needle stick injuries. Braun manufactures and sells an embodiment of the patented valve and supplied it to Abbott. However, after a disagreement, Braun no longer supplied the patented valve to Abbott. NP Medical developed a substitute valve and supplied it to Abbott. Braun then claimed that the NP Medical valve infringed its patent and sued both Abbott and NP Medical. After a ten day trial, the jury found that the NP Medical valves did not have an essential element required by the asserted patent claims. Hence, NP Medical and Abbott were found not liable for infringement, a result which the Federal Circuit upheld on the appeal. The fifth element of the patent claims called for "means with the other body element for holding said disc firmly against said first means in such a manner that said disc is restrained from sideways movement." In response to interrogatories propounded by the court, the jury interpreted this element to require a traverse bar or its equivalent, which it found lacking in NP Medical's valves. In upholding the jury's non-infringement finding on appeal, the Federal Circuit ruled that any error in giving claim interpretation to the jury was harmless because the jury got it right. The appeals court noted that the disputed element is in means-plus-function form, which is governed by section 112, paragraph 6 of the patent statute. That provision mandates that such a claim limitation "be construed to cover the corresponding structure...described in the specification and equivalents thereof." The Federal Circuit agreed with the jury that the traverse bar was the only "corresponding structure...described in the specification" and rejected Braun's argument that the valve seat could also meet that requirement. The Federal Circuit held that "structure disclosed in the specification is 'corresponding' structure only if the specification or prosecution history clearly links or associates that structure to the function recited in the claim. This duty to link or associate structure to function is the quid pro quo for the convenience of employing section 112, paragraph 6." In rejecting Braun's argument that the valve seat constituted "corresponding" structure because it could be seen in Fig. 3 of the patent, the court noted that "neither the specification nor the prosecution history contains any indication that the valve seat structure corresponds to the recited function, i.e., that it holds the flexible disc against the triangular member so as to restrain sideways movement." This explicitly endorsed narrow reading of means-plus-function language contains an important warning for the patent draftsperson. Where the convenience of means-plus-function language is employed, it is important that the specification clearly describe the "corresponding" structure, so that the claim is not unduly and inadvertently narrowed. Alternatively, means plus-function language, while nominally an attractive choice, may not be appropriate at all. The prosecutor of Braun's patent may have had no choice, but where possible, it may well be advisable to avoid means-plus-function language altogether and simply use broader descriptors for the claim elements. The court's decision contains significant rulings on other issues in addition to claim construction. It is likely to be cited often for its definitive statement that patent misuse is a shield only and not a sword; i.e., proof of patent misuse will render the patent unenforceable until the misuse is purged, but will not give rise to a damages claim on behalf of the accused infringer. However, the court was careful to note that the facts which give rise to a patent misuse defense may also support a damages claim on an antitrust or breach of contract theory. This statement may give patent infringement defendants added leverage for settlement under appropriate circumstances. But see the discussion above in the Xerox litigation. The decision of the Federal Circuit in B. Braun Medical has been welcomed by our clients as the successful conclusion of a vigorous defense against unmeritorious patent infringement charges. The case also calls attention to the importance of well-crafted patent claims on the one hand, and to the strategic significance of developing a thorough and energetic defense on the other.
Lee Bromberg's practice concentrates on litigation of complex intellectual property and business issues. License Agreements Need Careful Wording The Jervis B. Webb Company ("Webb") held a United States patent and patents in numerous foreign countries on a popular conveyor systems technology known as "wide dog" transfer. A wide dog mechanism transfers objects, such as automobile bodies, from one conveyor to another conveyor. Webb's competitor, Mid-West Conveyor Company, Inc. ("Mid-West") won a major contract from General Motors that covered 89 transfers and then negotiated a license from Webb so that it could use the wide dog technology for GM and in future projects. A royalty rate was agreed upon and the license agreement was executed. Several years later, Mid-West was interested in bidding a GM project in Australia. The president of Mid-West contacted Webb to determine if they owned a patent in Australia thinking that would affect whether or not a royalty payment would be required. Webb wrote Mid-West stating it held an Australian patent that would prevent Mid-West from using the wide dog technology in Australia. Webb also contended that the license agreement with Mid-West was limited to the United States. The Australian project was small so Mid-West let the issue slide. Later that year, the companies competed for a Peugeot installation in France. This time Mid-West took the position that the license granted rights to use the "wide dog" technology worldwide and brought suit to obtain a court ruling on the geographic scope of the license. Which party correctly interpreted the license agreement? The initial recital on the License Agreement states that "MID-WEST desires a nonexclusive license to practice the inventions disclosed and claimed in the Licensed Patent." The Licensed Patent is defined as "United States Patent No 4,616,570." The grant clause states that Mid-West was given "a nonexclusive, non-transferrable license to manufacture, use and sell, or have manufactured for use and sale by MID- WEST, ... systems incorporating any invention disclosed and claimed in the Licensed Patent ..." The Court of Appeals held that the License Agreement was ambiguous. Mid-West Conveyor Co. v. Jervis B. Webb Co., 92 F.3d 992 (10th Cir. 1996). The specific references to the United States patent tend to support the position that only that patent was licensed. However, the Agreement contained no territorial restriction and extended to "any invention disclosed and claimed in the Licensed Patent." While this defined the licensed invention, it did not limit the scope of the grant geographically. The holding that the Agreement was ambiguous opened up the proceedings to a determination of what the parties intended when they signed the agreement as manifested in extrinsic evidence. The evidence included the conduct of the parties during negotiations, the conduct of the parties with the Agreement in place, and Webb's licenses with others. Based on the fact that future projects were contemplated, royalties were paid and accepted for jobs in Canada and China and Webb's other licenses did specify the territorial scope, the court held that the License Agreement granted worldwide rights. It is the role of a trained attorney to try to anticipate changed circumstances and to draft agreements so that they produce predictable results in as many situations as possible. The client's opinion is sought with regard to numerous issues that may arise out of a contractual relationship. Thus, license agreements are rarely as straightforward as they may seem at first. Ambiguities foster disputes. This particular dispute could have been avoided by explicitly confronting the geographic scope when drafting the original license agreement. Thus, to create a license agreement that stands up to a test of time, it is best to devote the necessary time and energy. As Webb learned, licensing is often not the best way to profit from one's invention. The alternative route is to maintain exclusivity in one's proprietary technology. An exclusive market niche can be a highly desirable road to growing one's company. To the extent licenses are granted, they need to be well written and individualized to the needs of the parties.
Bob Asher practices patent law before the courts and the Patent and Trademark Office. Health Care Providers Must Have Compliance Programs The Congress and federal regulatory agencies continue to pursue new initiatives against fraud and abuse in federal health care programs, including Medicare and Medicaid. See The Dispatch, April 1997, available also at our web site www.bromsun.com. Following the Health Insurance Portability and Accountability Act of 1996, PL 104 191, the Congress recently enacted additional health care rules as part of the Balanced Budget Act of 1997. At the same time, HCFA's Office of the Inspector General has informally released a draft of new health care compliance requirements. The usual approach to health care fraud and abuse has been prescriptive: statutes and regulations prohibit certain health care practices under threat of substantial civil and criminal sanction. For example, the Stark act generally prohibits referrals to a health care provider in which the referring provider has a financial interest (subject, of course, to a number of "safe harbors"). Violation carries substantial civil penalties and threat of debarment from participation in federal health care programs. While the Health Insurance Portability and Accountability Act and the Balanced Budget Act continue this approach, these laws have also adopted an affirmative compliance requirement: health care providers must develop and implement compliance programs to affirmatively identify and avoid fraud and abuse issues in the first instance. It is likely the Inspector General and federal prosecutors will soon argue that a health care provider's failure to develop and implement a compliance program constitutes a reckless disregard for the fraud and abuse constraints of the anti-kickback statute, the false claims act, or the Stark act. Instantly, this will turn otherwise "innocent" non compliance with the statutes and regulations into a civil or criminal violation. Clearly, this raises compliance to an imperative. An effective compliance program will identify potential fraud and abuse issues before liability or prosecution is at issue. And where violations have been alleged, an effective compliance program may also rebut or at least limit prosecutorial claims of reckless disregard. The Inspector General is expected to issue model compliance program requirements for specific health care providers, beginning with hospitals, clinical laboratories, and imaging services. The model programs will require each health care provider to specify standards and procedures for compliance, including: audit level documentation of provider services and proper coding and billing; appointment of a compliance officer with oversight responsibility and direct access to the organization's board of directors; effective training and education programs for health care providers and operating staff; compliance violation reporting to the organization's board of directors and to the Inspector General; and effective remediation and correction of violations. To meet the requirements of the Health Insurance Portability and Accountability Act and the Balanced Budget Act, health care practices, plans, and practice management organizations should prepare now to develop and implement effective compliance programs.
Ed Dailey's practice concentrates on legal and strategic business issues in health care. Advisory to our Massachusetts Business Clients Employers Must Notify All Employees Of Policy Against Harassment Massachusetts has adopted a strong law prohibiting sexual harassment. See The Dispatch, September 1996 for a full statement about this law. Since November 1996, the law has required all Massachusetts employers to have a written compliance program which includes a policy against sexual harassment and a remedial program for investigating and resolving harassment claims. Employers are urged also to develop and implement a training and education program for all employees and supervisors. Copies of a company's compliance program must be given to new employees at the time of employment, must be available at all times to all employees, and must be distributed annually to all employees. Failure to comply with this law has serious consequences. A violation of Massachusetts laws prohibiting discrimination and harassment exposes an employer to unlimited punitive damages. To ensure compliance with this important law during 1998, each Massachusetts employer should distribute a copy of its sexual harassment policy and compliance program to all employees during January. If your company maintains its policies on line, employees should be notified to review the policy. Employees should be notified also of the company's commitment to comply with the law.
Lisa Fleming's practice concentrates on employment, benefits, and health care issues. She has developed practical and well received compliance and training programs for Massachusetts employers. The Dispatch is not legal advice. For legal assistance or further information, please call the lawyer with whom you regularly deal at our firm or the authors of these articles. |
